March 2012 Archive for Farmland Forecast

The USDA estimates in 2012 the U.S. will plant 95.9 million acres of corn, the most since before World War II. The record planting estimate surprised the market that was expecting more acres allocated to soybeans and spring wheat. Soybean planted acres decreased by a percent at the expense of the increased corn acres planted. The increase in corn acres in the Prospective Plantings report was bearish for corn, but the Quarterly Stocks report more than offset this increase. The U.S. only has 6.01 billion bushels of corn in stock, well below last year's levels and analyst predictions, implying demand for corn is still high.

Prospective Plantings

Farmers are expected to plant 225.7 million acres of corn, soybeans, and wheat for the 2012 crop year, a 1.8% increase from 2011's 221.3 million acres and the highest since 1982. Improving agricultural economics is incentivizing farmers to plant as much acres as possible. Net farm income for 2012 is expected to be $91.7 billion, the second highest on record.

Corn planted acres for 2012 were estimated at 95.9 million acres, the largest acreage since 1937 and a 4% increase from 2011's 91.9 million acres. High corn prices relative to soybeans and warm, dry weather has encouraged farmers to plant corn at the expense of soybeans.

Record corn acreage is expected in Idaho, Iowa, Minnesota, North Dakota, and South Dakota, while acreage is projected to decrease in the central and southern Great Plains. The large acreage is bearish for corn prices as a big corn crop may rebuild decade low supplies.

Soybean planted acres went in a different direction and was estimated at 73.9 million acres, a decrease of 1% from last year's 75.0 million acres and 5% from 2010. Soybean acreage is down or unchanged across the Corn Belt and Great Plains with the exception of Illinois, North Dakota, South Dakota, and Wisconsin.

If soybean prices continue to rise in the next few weeks, farmers may increase soybean acreage at the expense of corn acreage.

Wheat planted acres were estimated at 55.9 million acres, an increase of 3% from 2011's 54.4 million acres. Spring wheat acres were lower than expected at 14.2 million acres, an only 0.5 million increase from 2010. High wheat supplies provided little incentive for farmers to plant wheat.

Quarterly Stocks

Corn stocks as of March 1, 2012 were estimated at 6.01 billion bushels, an 8% decrease from March 1, 2011 and a 150 million bushels lower than market expectations. Of the 6.01 billion bushels, 3.19 billion are stored on farms, down 6% from 2011. 2.82 billion bushels were being held in off-farm locations, a 10% decrease from last year. Disappearance from December 2011 to February 2012 was 3.64 billion bushels compared with 3.53 billion bushels during the same period a year prior.

Soybean stocks as of March 1, 2012 were estimated at 1.37 billion bushels, a 10% increase from 2011 and somewhat in line with analysts’ estimates. On-farm stocks were 555 million bushels, a 10% increase from a year prior. 817 million bushels were located in off-farm locations, another 10% increase from last March. Disappearance from December 2011 to February 2012 was 998 million bushels, a 3% decrease from last year.

Wheat stocks as of March 1, 2012 were estimated at 1.20 billion bushels, a 16% decrease from a year prior. 217 million bushels were held in on-farm locations, down 25% from last March. Off-farm stocks were estimated at 983 million bushels, a 14% drop from a year ago. Disappearance from December 2011 to February 2012 was 462 million bushels, a decrease of 9% from last year.

Outlook

Corn and soybean prices rallied on this morning’s news. Realistically, we think 95.9 million acres of corn may not be achievable as high soybean prices may cause farmers to make a last minute switch and the fact there might not be enough corn seed to actually plant that many acres. Excellent planting weather may allow farmers to plant as much grain as possible though. We now anticipate the June 1 USDA report, which will provide a more accurate picture of planted acres.

Investing in agriculture has been one of the most popular investments over the last two years due to multi-decade low global grain supplies and growing demand from emerging markets. Grain prices and farmland values have risen substantially as capital has been attracted to agriculture’s rapid growth. The demand for agricultural assets has made attractive investment opportunities in agriculture harder and harder to find.

We recommend investors start looking farther north for compelling investment opportunities. Canada, the world’s seventh largest grain producer, is home to some of the world’s best farmland and agribusinesses. Despite Canada’s strong agricultural qualities, farmland valuations lag substantially behind the rest of the world.

For investor’s looking for investment opportunities in farmland, we see Canada as a compelling investment opportunity due to its attractive valuation, potential for substantial increases in production, and improving profitability. Investing in Canadian farmland today could turn out to be equivalent to investing in Midwestern U.S. farmland in 2009.

Attractive Valuations

Capitalization rates (rental income/price) in Canada are very attractive compared to the U.S. and the rest of the world. With proper sourcing and due diligence, farmland in Canada can be obtained at 6-7% cap rates. This compares to farmland cap rates of 5-5.5% in the U.S. Corn Belt, 4% in Argentina, and only 2-2.5% in the U.K. There are many reasons for the difference in cap rates across countries, but we believe the primary factor for the above average cap rates in Canada is the lag in appreciation compared to the rest of the world.

Canadian farmland values have performed well over the past 12 months, but not as fast as the U.S. Corn Belt. Saskatchewan farmland values increased by 14.3% year over year, according to Farm Credit Canada, while prime U.S. farmland increased by 31% in Iowa, according to The Federal Reserve Bank of Chicago. Alberta farmland increased in value by 5.5% year over year and Manitoba by 3.7%.

Dissolution of Canadian Wheat Board

For 76 years, the government operated Canadian Wheat Board (CWB) has maintained a monopoly on purchasing and selling wheat and barley in Manitoba, Saskatchewan, Alberta, and parts of British Columbia. The grain market monopoly will come to an end in August of 2012 as Canada's Conservative Party passed a bill in 2011 to strip the board of its control.

Many farmers, investors, and businesses alike are excited to participate in a free market and benefit from market prices. Businesses will have more reason to build facilities and infrastructure if they can buy grain directly from farmers, rather than paying a premium through the CWB. Farmers will have the ability to turn a larger profit margin as they will be able to better time the market and sell grain at more opportunistic points throughout the year.

Higher revenues for farmers will directly affect the underlying farmland values. Farmers will be incentivized to increase production through planting more acres and investing in innovation to increase efficiency. Increased profitability, infrastructure, and efficiency are all tremendous ingredients to attract investors. Canadian grain will finally be free at last.

Rising Production

Weather in the southern plains of Canada is very similar to the U.S. Corn Belt with two major exceptions. The first difference is the length of the growing season. On average, the growing season is 52 days shorter, which requires shorter maturity seeds that result in substantially lower yields than the Corn Belt. The second difference is the amount of precipitation. Cedar Rapids, Iowa receives an average of 34.7 inches of precipitation per year, according to The Weather Channel, while Regina, Saskatchewan receives under half as much precipitation at 14.3 inches annually.

Canadian farmland does feature an extremely cold winter frost that will naturally deter insects, plant disease, and soil compaction. Even less pesticide is needed in Canada than in the U.S. which should help farmer input costs remain relatively lower.

Global demand for corn is rising substantially each year. As a result, more acres are being allocated to corn production in the Midwest and soon the trend of planting corn will be spreading into Canada. Cold tolerance is an issue in Canada as the growing season is shorter than that of the Corn Belt. Seed companies invest millions of dollars each year into research and development for new and improved cold and drought tolerant hybrids. Due to advances in biotechnology, scientists have been able to produce cold tolerant hybrid seeds that are able to be planted earlier in the spring season. These cold tolerant seeds have allowed corn to be planted in regions of Canada where we never thought possible and the area will continue to spread.

Seed varieties are expanding into shorter maturity dates as well. 120 day corn grows well in central Illinois, but much shorter maturity is needed moving north as the growing season shortens. Companies such as Monsanto, DuPont, and Croplan Genetics continually shorten the maturity dates of field corn allowing for such expansion of the traditional Corn Belt.

Strategic Location

Emerging markets of China and India will continue to demand an ever increasing amount of corn and soybeans, which will need to be shipped through the Pacific Northwest ports of North America. Canadian farmland poses an excellent competitive advantage over U.S. farmland as Canadian farmland is located substantially closer to the ports in the Pacific Northwest.

Rail lines, including Canadian National and Canadian Pacific, will help transport valuable grain grown in the southern plains of Canada to the western seaboard for export to China and other emerging markets in Asia.

Due to the expanding grain logistics along the current rail lines in British Columbia, Alberta, Saskatchewan, and Manitoba, grain offtakes such as elevators and ethanol plants will compete for grain and drive the local commodity prices higher, translating to higher farm income and farmland values over time.

Excellent Soil Quality

The southern plains of Canada are comprised of the same top quality Mollisol soil types as the Midwestern U.S. Mollisol soils are only found in four areas in the world; central North America, the Pampas region of Argentina, the Steepes of Ukraine, and the Yellow River Valley of China. These soils are thick, contain excellent top soil, and have large amounts of organic material which efficiently hold moisture and fertilizers. These characteristics make Mollisols ideal for producing row crops like corn and soybeans.

There is variance across Mollisols, but strong yielding corn and soybean crops will grow on all Mollisol soils leaving climate as the limiting factor in Canada. High quality soil in the southern plains of Canada is very similar to 200+ bushel an acre corn soil in Iowa and Illinois, yet currently valued at a 75% discount.

Crop Diversification

The variety of crops grown in the southern provinces of Canada provides diversification for farmers as upwards of 14 major crops are grown annually. Chiefly canola, wheat, oats, and rye are grown on the ancient tall grass prairies of Canada stretching from Alberta to Manitoba.

These key crops are in high demand for the manufacturing of food products for animal and human consumption worldwide and domestically. Saskatchewan, in particular, produces the most of these crops, as 44% of Canada's total cultivated farmland is located inside the province. In addition to crops being used for food, there is an increasing demand for Canadian grains to be used in biofuel production.

The U.S. has a goal to produce 36 billion gallons of renewable energy by the year 2022. In 2011, the U.S. produced 13.5 billion gallons of ethanol. In order to meet their goal, the U.S. is going to have to look elsewhere, and Canada is a prime candidate neighboring to the north. In September of 2011, the Environmental Protection Agency approved the use of Canadian crops in U.S. biofuels. Canada became the first country, outside the U.S., to gain such approval. The biofuel approval will generate a new demand for Canadian grains primarily driven by the U.S., to serve as a safe and local back-up.

Conclusion

We believe that growing demand for agriculture is going to create a substantial amount of wealth across the globe. The popularity of agriculture over the last two years has made it more difficult to identify attractive investment opportunities and we believe investors need to be selective.

We see Canadian farmland as the next frontier for investors as valuations on a relative basis to the U.S. and the rest of the world are very attractive. Improving technologies driving the expansion of the Corn Belt and better pricing due to the dissolution of the CWB, will continue to drive farmland values higher in Canada.

The Rural Mainstreet Index (RMI) increased slightly this month, primarily due to increased exports of agriculture commodities. Farm income continued to grow as March marked the 26th straight month the index has been above growth neutral. Cash rent prices for agricultural land have been increasing alongside farmland values and farm income.

The Rural Mainstreet Index increased to 59.8, a modest increase from the 59.6 it posted last month, and remained above the 56.7 it posted 12 months prior.

According to Creighton University economist Ernie Goss, “Higher energy and fuel prices have not slowed growth in the farm economy. Compared to this time last year, the Rural Mainstreet economy is expanding at a faster pace with almost all economic dimensions stronger. Exports continue to be an important driver of growth.”

Agriculture

The farmland price index increased to 78.7 this month from 75.0 in February. This marks the 26th straight month the index has been above growth neutral. As spring season approaches and farmers are focused on planting the upcoming crop, the farm equipment sales index declined to 61.5 from February's 63.4.

Bankers were asked this month, as they were also asked in May of 2010, to assess the change in cash rent prices for farmland over the past 12 months. 39% of bankers reported cash rents growing by more than 10.0% year-over-year whereas only 3.0% reported this type of growth in May of 2010.

Banking

The loan volume index increased to 48.4 from 31.2 a month prior. The check deposit index increased to 69.4 from 64.5 in February and the certificate of deposit and savings instruments decreased to 48.4 from a neutral 50.0 last month.

March's hiring index increased to 60.0 compared to 53.7 in February. “Job growth for Rural Mainstreet communities has strengthened over the past several months after many months of stagnation,” said Goss.

The economic confidence increased to 63.0 from February's 60.3 as, “Improving national economic reports along with very healthy exports are clearly and positively affecting the economic outlook of bankers in our survey,” according to Goss.

Survey

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

The WASDE had minimal changes for the U.S. balance sheet, but did have significant revisions for South America. Soybean production in South America was reduced by a total of 6.4 million tons. The lack of changes was expected for corn, but an increase to domestic soybean exports was expected.

Corn

Domestic corn balance sheets remained unchanged this month. U.S. ending stocks remained at 801 million bushels and the stocks-to-use ratio was unchanged at 6.3%. The projected range for season-average corn prices was narrowed on both ends of the range by 10 cents to $5.90 to $6.50.

2011/12 global coarse grain supplies were increased by 1.6 million tons reflecting increased production in Brazil and India. Brazil's corn production was raised by 1.0 million tons due to an expected increase in planted acres for their second crop. The increase was partially offset by reduced production in South Africa and Ecuador.

We will continue to watch South American corn production as La Niña weather patterns of extreme heat reduce yield prospects.

Soybeans

U.S. soybean supply and use projections for 2011/12 were unchanged from February to March. Domestic exports were unchanged from last month at 1.275 billion bushels which surprised analysts who expected a 75 million bushel increase. The USDA left exports unchanged due to reduced global imports because South America's decreased supply resulted in higher prices. The U.S. season-average price range for 2011/12 was increased by 30 cents on both ends of the range to $11.40 to $12.30 per bushel.

Global oilseed production for 2011/12 is now projected to decline by 6.7 million tons to 445.7 million tons due to lower foreign production. Brazil's soybean production forecast was lowered by 3.5 million tons to 68.5 million tons from last month due to lower projected yields from hot, dry conditions in the southern states. Argentina production was forecast at 46.5 million tons, a 1.5 million ton reduction, due primarily to hot and dry weather in the northeastern growing areas. Paraguay's drought resulted in a 1.4 million ton decrease from last month in soybean production to 5.0 million tons, which is 34% below early-season expectations.

If soybean prices continue to be supported by decreased foreign production, we expect an increase in soybean acres planted in 2012 at the expense of corn acreage.

Wheat

U.S. wheat ending stocks for 2011/12 were projected 20 million bushels lower in March as increased exports more than offset lower food use. Domestic food use was projected 5.0 million bushels lower reflecting flower production data reported by the North American Miller's Association. U.S. exports were increased by 25 million bushels due to strong sales and shipments. The season-average price remains unchanged at $7.15 to $7.45 per bushel.

Global wheat supplies for 2011/12 were unchanged as increased production in Australia was offset by decreased beginning stocks in China and Bangladesh.

Outlook

Moving forward, the grain markets will be closely watching South America's corn and soybean production and La Niña weather patterns affect on yields. As we move closer to planting season, we are anticipating the March 30th Prospective Planting report, which will set the tone for the 2012 season.

Farmers are anxiously waiting to start the 2012 planting season which typically commences the second week of April, but may arrive early this year. Mild temperatures and lack of moisture will lead to early field access for farmers across the Corn Belt. Grain markets performed well this month as global demand for grains continues to increase as proven by strong export data and a weaker U.S. Dollar. Farmland values also continued to increase according to District Federal Reserve Reports.

Grain Prices

Corn prices increased by 2.7% in February and closed at $6.56 per bushel. Prices follow the upward trend of soybeans, even though a record amount of corn is set to be planted this year. The U.S. export market strengthened as Vietnam rejected corn shipments from India, Asia’s largest corn exporter, due to pests. In this month's WASDE Report, the USDA projected U.S. corn exports at 50 million bushels higher due to an increase in sales and shipments and a decrease in Argentina's supplies. Ending U.S corn stocks were also decreased by 45 million bushels to 801 million bushels, leaving the stocks-to-use ratio at 6.3% compared to the 5-year historical average of 12%.

Soybean prices increased substantially by 9.5% this month to close at $13.13 per bushel, a five-month high. Perspective purchasers drove prices higher by increased buying. World soybean production was forecasted 7.2% lower for 2012/13, according to World Oil, which would mark the largest year over year decrease in history due to poor South American weather conditions. This month's USDA WASDE Report left soybean ending stocks and exports unchanged in the U.S. from the January report. Expect soybean prices to react to the March 30th USDA Perspective Plantings Report if planted acres deviates from 75 million acres.

Wheat prices were nearly unchanged this month, loosing $0.02 on the front month contract closing at $6.64 per bushel this month. Ample global wheat supplies have kept the wheat markets calm throughout February. U.S. wheat ending stocks for 2011/12 were projected 25 million bushels lower to 845 million bushels in the February WASDE Report. Exports were increased by 25 million bushels due to strong sales, strong shipments, and competitively priced feed.

Farmland Values

From January 1, 2011 to January 1, 2012, farmland values in the 7th Federal Reserve District in Chicago rose 22%, the largest annual increase since 1976 according to the Federal Reserve Bank of Chicago’s fourth quarter survey of Farmland Values and Credit Conditions Report. The Kansas City Fed reported a similar 25% increase year-over-year. Farmland values soared to record highs due to strong farmer demand.

According to the USDA's most recent forecasts, 2011 net farm income is anticipated to be $98.1 billion in 2011, a 24% increase from 2010 levels. The key drivers of net farm income in 2011 were rising corn and soybean prices. Corn prices averaged 57% higher compared to 2010, while soybeans averaged a 26% increase over last year.

The farmland price index increased to 75.0 this month from 74.3 in January, according to the Creighton University Rural Mainstreet Index. This marks the 25th straight month the index has been above growth neutral. The farm equipment sales index declined to 63.4 from 72.3 in January. Bankers were asked what their forecast was for farmland prices in the coming year. Almost half, 46%, forecast prices to grow between 1% and 5% while only 8% of bankers expect prices to decline.

Crop Forecast

Heavy precipitation fell across much of the Midwest via a major storm system at the end of the month. Portions of southern Minnesota received over two inches of rain in less than 24 hours. Heavy snow blanketed much of the upper Midwest, but a delayed planting season is not a concern as the Corn Belt has had minimal moisture thus far this winter.

USDA Chief Economist, Joe Glauber, stated this month that U.S. farmers are expected to plant 94 million acres of corn and 75 million acres of soybeans this upcoming crop year. 94 million acres of corn would be the highest amount planted since 1944 and a 2.3% increase from 2011/12, although this month's USDA estimates are perfectly in line with the USDA baseline forecasts. Grain prices reacted mildly to the news as traders didn't expect much deviation from the baseline projections. Expect grain markets to react to any sort of variation from 94 million corn acres and 75 million soybeans acres once the USDA Perspective Plantings Report is released on March 30th.

Outlook

Often the amount of excess moisture had been the problem delaying planting for farmers across the Midwest in recent years, but this year the lack of moisture has been causing concern. The recent burst of precipitation across the Corn Belt will have hopefully been the first of welcomed change in weather patterns that will produce more moisture than over the previous six months. Farmers will need ample moisture for proper seed germination after planting.

Our attention will be turned to the March 30th Perspective Plantings Report from the USDA which will dictate grain prices into planting this year. Any forecast less than 94 million acres for U.S. corn plantings will be bullish for corn prices.